Earnings Season update for February 12th
Bottom Line: Reality has set in once again in the stock market. The reality being that even in a good and improving economy corrections happen. That after a record 15 month run up, some profit taking would be natural. That's not taking away from the fundamentally sound story of earnings season. Here's the good news...
Through last week, half of companies had reported their results for the fourth quarter. The expectations were high for America's companies. The average estimate for earnings growth is 10.8 percent year over year and all eleven sectors of the US economy are projected to have grown. So, are we getting the follow through?
68 percent of companies have reported
74 percent have reported positive earnings surprises and 79 percent have topped sales targets
Earnings growth has been 14 percent
Expectations were high and once again companies are crushing them. In fact, for folks wondering and worrying about whether something was wrong all of the sudden due to the correction, it's actually quite the opposite. Earnings have only improved over the past week's reporting. This means that prices are simply cheaper for many companies today. Not that fundamentals have negatively changed.
This is great news for those looking for value opportunities in the market. The selling that's taken place is in the face of outstanding earnings. That just means that companies are generally a better value. There's still a heck of a lot of room for optimism.
Don't forget, we haven't had a strong economy in 12-13 years and we haven't had one as good as this since the late 90's. It's natural to have become conditioned to mediocrity when it's been so long but this economy is different and has been showing its strength for 9+ months. Current growth estimates are now at 3.2% for the first quarter economy and candidly I'm showing 4%+ in my research. How different is that? The average first quarter growth rate of the past decade has been 1%. It's only been 1.9% on average over the past five years.
Over the next couple of weeks, the benefit of the tax cuts for the average American will being to show up in paychecks. As a reminder the average American will benefit from tax reform by 4%, or an extra $1,980 this year. Add in raises and the average net take home pay is 7%+ higher. With consumer spending adding up to be about 70% of the US economy - clearly there's lots of room for optimism still...